UFP TECHNOLOGIES INC

The interim condensed consolidated financial statements of UFP Technologies, Inc. (the “Company”) presented herein, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2023, included in the Company's 2023 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The condensed consolidated balance sheets as of June 30, 2024 and December 31, 2023, the condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2024 and 2023, the condensed consolidated statements of stockholders’ equity for the three and six months ended June 30, 2024 and 2023, and the condensed consolidated statements of cash flows for the six months ended June 30, 2024 and 2023 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. The condensed consolidated balance sheet as of December 31, 2023 has been derived from the Company’s annual financial statements that were audited by an independent registered public accounting firm but does not include all of the information and footnotes required for complete annual financial statements.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The results of operations for the three- and six-month periods ended June 30, 2024 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2024.

Recent Accounting Pronouncements

There are no newly issued accounting pronouncements that the Company expects to have a material effect on the financial statements.

On June 24, 2024, the Company purchased 100% of the outstanding shares of common stock of Marble Medical, Inc., (“Marble”) pursuant to a stock purchase agreement and related agreements, for an aggregate purchase price of $4.5 million in cash, plus up to an additional $0.5 million based upon the achievement of sales targets of Marble for each of the 12-month periods ended December 31, 2024, and 2025. The purchase price was subject to adjustment based upon Marble’s working capital at closing, and further adjustment when the final working capital is determined. A portion of the purchase price is being held by the Company to indemnify the Company against certain claims, losses, and liabilities. The Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type.

Founded in 1988 and headquartered in Tallahassee, FL, Marble Medical develops and manufactures adhesive based medical components and single-use devices. The purchase price includes certain real estate, which encompasses Marble’s manufacturing, warehouse and office facilities.

Acquisition costs associated with the transaction were approximately $145 thousand which was charged to expense in the three- and six-month periods ended June 30, 2024. These costs were primarily for legal and valuation services, which are reflected on the face of the Condensed Consolidated Statements of Comprehensive Income.

As the revenues, earnings, balance sheet, and pro forma effects of the Marble acquisition are not, and would not have been, material to the results of operations or financial position of the Company, the Company has elected to not disclose substantially all required disclosures of Accounting Standards Codification 805,Business Combinations, for this acquisition.

The Company recognizes revenue when a customer obtains control of a promised good or service. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to in exchange for promised goods or services. The Company recognizes revenue in accordance with the core principles of ASC 606 which include (1) identifying the contract with a customer, (2) identifying separate performance obligations within the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue. The Company recognizes all but an immaterial portion of its product sales upon shipment. The Company recognizes revenue from the sale of tooling and machinery primarily upon customer acceptance. The Company recognizes revenue from engineering services, which are primarily product development services, as the services are performed or as otherwise determined based on the substance of the agreement. The Company recognizes revenue from bill-and-hold transactions at the time the specified goods are complete and available to the customer.

Standard payment terms are net 30 days unless contract terms state otherwise. When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. We do not assess whether a significant financing component exists if the period between when we perform our obligations under the contract and when the customer pays is one year or less. In the ordinary course of business, the Company accepts sales returns from customers for defective goods, such amounts being immaterial. Although only applicable to an insignificant number of transactions, the Company has elected to exclude sales taxes from the transaction price. The Company has elected to account for shipping and handling activities for which the Company is responsible under the terms and conditions of the sale not as performance obligations but rather as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized. Variable consideration to be included in the transaction price is estimated using either the expected value method or the most likely method based on facts and circumstances. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the contract will not occur. The Company has elected to not disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations, as the Company’s contracts have an original expected duration of one year or less, or revenue has been recognized at the amount for which the Company has the right to invoice for engineering services performed.

Disaggregated Revenue

The following table presents the Company’s revenue disaggregated by the major types of goods and services sold to the Company’s customers (in thousands) (See Note 12 for further information regarding net sales by market):

Contract balances

The timing of revenue recognition may differ from the timing of invoicing to customers. When invoicing occurs prior to revenue recognition, the Company has contract liabilities included within “deferred revenue” on the condensed consolidated balance sheets.

The following table presents a roll-forward of contract liabilities activity for the six-month periods ended June 30, 2024 and 2023 (in thousands):

Revenue recognized during the six-month periods ended June 30, 2024 and 2023 from amounts included in deferred revenue at the beginning of the period were approximately $3.0 million and $2.0 million, respectively.

When invoicing occurs after revenue recognition, the Company has contract assets, included within “receivables, net” on the condensed consolidated balance sheets.

The following table presents opening and closing balances of contract assets for the six-month periods ended June 30, 2024 and 2023 (in thousands):

Supplemental cash flow information consists of the following (in thousands):

Receivables consist of the following (in thousands):

The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, and a review of the current status of customers' trade accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on the aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written-off when determined to be uncollectible. Estimates based on an assessment of anticipated payment and all other historical, current, and future information that is reasonably available are used to determine the allowance.

The following table provides a roll-forward of the allowance for credit losses that is deducted from accounts receivable to present the net amount expected to be collected for the six months ended June 30, 2024 and 2023 (in thousands):

Financial instruments recorded at fair value in the consolidated balance sheets, or disclosed at fair value in the footnotes, are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by ASC 820,Fair Value Measurements and Disclosures, and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities, are as follows:

Level 1

Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2

Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3

Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table presents the fair value and hierarchy levels, for financial assets that are measured at fair value on a recurring basis (in thousands):

In connection with the acquisitions of Marble Medical in 2024 and DAS Medical in 2021, the Company is required to make contingent payments, subject to the entities achieving certain financial performance thresholds. The contingent consideration payments for the Marble Medical acquisition and the DAS Medical acquisition are up to $500 thousand and $20 million, respectively. The fair value of the liability for the contingent consideration payments recognized upon the acquisition as part of the purchase accounting opening balance sheets totaled approximately $400 thousand and $9.7 million for the Marble Medical acquisition and the DAS Medical acquisition, respectively, and was estimated by discounting to present value the probability-weighted contingent payments expected to be made. Assumptions used in the initial calculation were management’s financial forecasts, discount rate and various volatility factors. The ultimate settlement of contingent consideration could deviate from current estimates based on the actual results of these financial measures. Contingent consideration is considered to be a Level 3 financial liability that is re-measured each reporting period. The fair value of the liability for the contingent consideration payments recognized at June 30, 2024 totaled approximately $9.0 million out of the remaining potential payments of $10.5 million. The change in fair value of contingent consideration for the acquisition is included in change in fair value of contingent consideration in the condensed consolidated statements of comprehensive income.

Also in connection with the DAS Medical and Advant Medical acquisitions, the Company has entered into Non-Competition Agreements with the beneficiaries (certain previous owners of DAS and Advant) and the Company has agreed to pay additional consideration to the parties to the Non-Competition Agreements, including an aggregate of $10.0 million in payments over theten years following the closing of the DAS Medical acquisition for the 10-year noncompetition covenants of certain key owners and an aggregate of €375 thousand in payments over the three years following the third anniversary of the closing of the Advant Medical acquisition for the 5-year noncompetition covenants of the owner. The Company paid approximately $1.7 million during the first quarter of 2024 related to non-competition agreements. The present value of the Non-Competition Agreements at June 30, 2024 totaled approximately $6.5 million. This liability is considered to be a Level 3 financial liability that is re-measured each reporting period.

The Company has financial instruments, such as accounts receivable, accounts payable, and accrued expenses, that are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fair value as the interest rate on the debt approximates the estimated borrowing rate currently available to the Company.

Share-based compensation is measured on the grant date based on the fair value of the award and is recognized as an expense over the requisite service period (generally the vesting period of the equity grant).

The Company issues share-based awards through several plans that are described in detail in the notes to the consolidated financial statements for the year ended December 31, 2023. The compensation cost charged against income for those plans is included in selling, general & administrative expenses as follows (in thousands):

The total income tax benefit recognized in the condensed consolidated statements of comprehensive income for share-based compensa tion arrangements was approximately $486 thousand and $1.5 million for the three-and-six-month periods ended June 30, 2024, respectively, and approximately $752 thousand and $1.6 million for the three-and-six-month periods ended June 30, 2023.

Common Stock Grants

The compensation expense for common stock granted during the six-month period ended June 30, 2024, was determined based on the market price of the shares on the date of grant.

Stock Option Grants

The following is a summary of stock option activity under all plans for the six-month period ended June 30, 2024:

On June 6, 2024, the Company granted options to its directors for the purchase of 2,958 shares of the Company’s common stock at that day’s closing price of $260.92. The compensation expense related to these grants was determined as the fair value of the options using the Black-Scholes option pricing model based on the following assumptions:

The stock volatility for each grant is determined based on a review of the experience of the weighted average of historical daily price changes of the Company’s common stock over the expected option term, and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods correspond‐ing with the expected term of the option. The expected term is estimated based on historical option exercise activity.

During the six-month periods ended June 30, 2024 and 2023, the total intrinsic value of all options exercised (i.e., the difference between the market price and the price paid to exercise the options) was approximately $1.5 million and $3.0 million, respectively, and the total amount of consideration received by the Company from the exercised options was approximately $212 thousand and $789 thousand, respectively. At its discretion, the Company allows option holders to surrender previously owned common stock in lieu of paying the exercise price and withholding taxes. During the six-month period ended June 30, 2024,653 shares were surrendered at an average market price of $162.93. During the six-month period ended June 30, 2023,861 shares were surrendered at an average market price of $127.05.

Restricted Stock Unit awards

The following table summarizes information about RSU activity during the three-month period ended June 30, 2024:

At the Company’s discretion, upon vesting, RSU holders are given the option to net-share settle to cover the required minimum withholding tax and the remaining amount is converted into the equivalent number of common shares and issued to the RSU holder. During the six-month periods ended June 30, 2024 and 2023,21,914 shares and 20,457 shares were surrendered at an average market price of $216.80 and $117.95, respectively.

As of June 30, 2024, the Company had approximately $8.3 million of unrecognized compensation expense that is expected to be recognized over a period of 2.8 years.

Inventories are stated at the lower of cost (determined using the first-in, first-out method) or net realizable value, and consist of the following at the stated dates (in thousands):

Property, plant, and equipment consist of the following (in thousands):

The Company has operating and finance leases for offices, manufacturing plants, vehicles and certain office and manufacturing equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component, thus causing all fixed payments to be capitalized. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right of use (“ROU”) assets or lease liabilities. These are expensed as incurred and recorded as variable lease expense. The Company determines if an arrangement is a lease at the inception of a contract. Operating and finance lease ROU assets and operating and finance lease liabilities are stated separately in the condensed consolidated balance sheet.

ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments pursuant to the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company's assumed lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets are also adjusted for any deferred or accrued rent. As the Company's leases do not typically provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

ROU assets and lease liabilities consist of the following (in thousands):

The components of lease costs for the six-month periods ended June 30, 2024 and 2023 consist of the following (in thousands):

The aggregate future lease payments for leases as of June 30, 2024 are as follows (in thousands):

Basic income per share is based on the weighted average number of shares of common stock outstanding. Diluted income per share is based upon the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during each period.

The weighted average number of shares used to compute basic and diluted net income per share consisted of the following (in thousands):

The computation of diluted earnings per share excludes the effect of the potential exercise of stock awards, including stock options, when the average market price of the common stock is lower than the exercise price of the related stock options during the period. These outstanding stock options are not included in the computa‐tion of diluted income per share because the effect would be antidilutive. For the three- and six-month periods ended June 30, 2024, there wereno stock awards excluded from the computation of diluted earnings per share for this reason. For the three- and six-month periods ended June 30, 2023, the number of stock options excluded from the computation of diluted earnings per share for this reason was 4,281 and 12,153, respectively.

The Company consists of asingle operating and reportable segment.

Revenues shipped to customers outside of the United States comprised approximately 18.8% and 18.6% of the Company’s consolidated revenues for the three-and-six-month periods ended June 30, 2024, respectively. Revenues shipped to customers outside of the United States comprised approximately 18.5% and 17.6% of the Company’s consolidated revenues for the three-and-six-month periods ended June 30, 2023, respectively. One customer comprised approximately 33.9% and 33.1% of the Company’s consolidated revenues for the three-and-six-month periods ended June 30, 2024, respectively. One customer comprised approximately 24.7% and 22.7% of the Company’s consolidated revenues for the three-and-six-month periods ended June 30, 2023, respectively. On June 30, 2024, one customer represented approximately 13.3% of gross accounts receivable. On December 31, 2023, two customers represented approximately 16.5% and 12.2%, respectively, of gross accounts receivable. Approximately 18.4% of all long-lived assets are located outside of the United States.

The Company’s products are primarily sold to customers within the Medical, Aerospace & Defense, Automotive, and Industrial/Other markets. Sales by market for the three and six months ended June 30, 2024 and 2023 are as follows (in thousands):

The changes in the carrying amount of goodwill for the six months ended June 30, 2024 are as follows (in thousands):

The carrying values of the Company’s definite lived intangible assets as of June 30, 2024 are as follows (in thousands):

Amortization expense related to intangible assets was approximately $1.0 million and $2.0 million for the three- and six-month periods ended June 30, 2024, respectively, and $1.0 million and $2.1 million for the three- and six-month periods ended June 30, 2023, respectively. The estimated remaining amortization expense as of June 30, 2024 is as follows (in thousands):

Other long-term liabilities consist of the following (in thousands):

The determination of income tax expense in the accompanying unaudited condensed consolidated statements of income is based upon the estimated effective tax rate for the year, adjusted for the impact of any discrete items which are accounted for in the period in which they occur. The Company recorded income tax expense of approximately 22.0% and 19.8% of income before income tax expense for the three- and six-month periods ended June 30, 2024, respectively, and 25.6% and 22.4% of income before income tax expense for the three- and six-month periods ended June 30, 2023, respectively

On June 27, 2024, the Company, as the borrower, entered into a secured $275 million Amended and Restated Credit Agreement (the “Third Amended and Restated Credit Agreement”) with certain of the Company’s subsidiaries (the “Subsidiary Guarantors”) and Bank of America, N.A., in its capacity as the initial lender, Administrative Agent, Swingline Lender and L/C Issuer, and certain other lenders from time-to-time party thereto. The Third Amended and Restated Credit Agreement amends and restates the Company’s prior credit agreement, originally dated as of December 22, 2021.

The credit facilities under the Third Amended and Restated Credit Agreement consist of a secured term loan to the Company of up to $125 million and a secured revolving credit facility, under which the Company may borrow up to $150 million. The Third Amended and Restated Credit Facilities mature on June 27, 2029. This maturity date is subject to acceleration and the Company could be subject to additional fees and expenses in certain circumstances should one or more events of default described in the Third Amended and Restated Credit Agreement occur. The secured term loan requires quarterly principal payments of $3,125,000 that commence on December 31, 2024. The proceeds of the Third Amended and Restated Credit Agreement may be used for general corporate purposes, including funding the acquisition of AJR Enterprises, LLC (see Note 17 for more information regarding this acquisition), as well as certain other permitted acquisitions. The Company’s obligations under the Third Amended and Restated Credit Agreement are guaranteed by Subsidiary Guarantors and secured by substantially all assets of the Company.

The Third Amended and Restated Credit Facilities call for interest at SOFR plus a margin that ranges from 1.25% to 2.25% or, at the discretion of the Company, the bank’s prime rate plus a margin that ranges from.25% to 1.25%. In both cases the applicable margin is dependent upon Company performance. Under the Third Amended and Restated Credit Agreement, the Company is subject to a minimum fixed-charge coverage financial covenant as well as a maximum total funded debt to EBITDA financial covenant. The Third Amended and Restated Credit Agreement contains other covenants customary for transactions of this type, including restrictions on certain payments, permitted indebtedness and permitted investments.

At June 30, 2024, the Company had approximately $35.2 million in borrowings outstanding under the Third Amended and Restated Credit Agreement, and also had approximately $0.7 million in standby letters of credit outstanding, drawable as a financial guarantee on worker’s compensation insurance policies. At June 30, 2024, the applicable interest rate was approximately 6.9% and the Company was in compliance with all covenants under the Third Amended and Restated Credit Agreement.

Long-term debt consists of the following (in thousands):

Future maturities of long-term debt at June 30, 2024 are as follows (in thousands):

Acquisition of AJR Enterprises

On July 1, 2024, the Company purchased 100% of the outstanding membership interests of AJR Enterprises, LLC, (“AJR”) pursuant to a Securities Purchase Agreement, for an aggregate purchase price of $110 million in cash. The purchase price was subject to adjustment based upon AJR’s estimated working capital at closing, and further adjustment when the final working capital is determined. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type. As part of the Securities Purchase Agreement, the Sellers as well as certain restricted parties have agreed to not compete with the Company for a period ofseven years.

AJR , is headquartered in St. Charles, IL, with additional manufacturing in the Dominican Republic. AJR brings us a strategic leadership position in the growing single-use safe patient handling space, as well as expertise in specialty fabrics and a very low-cost manufacturing operation.

Acquisition costs associated with the transaction were approximately $422 thousand which was charged to expense in the three- and six-month periods ended June 30, 2024. These costs were primarily for legal and valuation services, which are reflected on the face of the Condensed Consolidated Statements of Comprehensive Income.

Due to the timing of the AJR acquisition, the accounting for this business combination is incomplete. As a result, it is impracticable for the Company to disclose substantially all required disclosures of Accounting Standards Codification 805,Business Combinations, for this acquisition.

Acquisition of Welch Fluorocarbon

On July 15, 2024, the Company purchased 100% of the outstanding shares of common stock of Welch Fluorocarbon, Inc., (“Welch”) pursuant to a stock purchase agreement and related agreements, for an aggregate purchase price of $34.6 million in cash, plus up to an additional $6.0 million based upon the achievement of certain EBITDA targets of Welch for each of the 12-month periods ended December 31, 2024, 2025 and 2026. The purchase price was subject to adjustment based upon Welch’s estimated working capital at closing, and further adjustment when the final working capital is determined. A portion of the purchase price is being held in escrow to indemnify the Company against certain claims, losses, and liabilities. The Purchase Agreement contains customary representations, warranties, and covenants customary for transactions of this type.

Founded in 1985 and headquartered in Dover, New Hampshire, Welch Fluorocarbon develops and manufactures thermoformed, and heat sealed implantable medical device components utilizing thin, high-performance films.

Acquisition costs associated with the transaction were approximately $229 thousand which was charged to expense in the three- and six-month periods ended June 30, 2024. These costs were primarily for legal and valuation services, which are reflected on the face of the Condensed Consolidated Statements of Comprehensive Income.

Due to the timing of the Welch Fluorocarbon acquisition, the accounting for this business combination is incomplete. As a result, it is impracticable for the Company to disclose substantially all required disclosures of Accounting Standards Codification 805,Business Combinations, for this acquisition.

Funding of Acquisitions * *

Both the above noted acquisitions were funded through borrowings under the Company’s Third Amended and Restated Credit Agreement. Subsequent to these acquisitions, as of July, 15, 2024, the Company had approximately $179.2 million outstanding under the Third Amended and Restated Credit Agreement, $115 million of which was under its secured term loan and $64.2 million of which was under its revolving credit facility. As of July 15, 2024, after reducing the available amount by certain letters of credit, the Company had approximately $85.1 million available to draw under its revolving credit facility. As of July 15, 2024, until December 31, 2024, the Company may draw up to an additional $10 million of borrowing under its secured term loan.

ITEM 2: ** MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** RESULTS OF **OPERATIONS